Intermodal stakeholders gauge impacts of the Panama Canal expansion

(source: Progressive Railroading June 2017)

By Daniel Niepow, Associate Editor

In early May, the Port of Virginia welcomed the COSCO Development container ship, the largest vessel to call on the U.S. East Coast to date. Over the course of the ship’s 30-plus-hour stop at the Virginia International Gateway terminal, crews loaded and unloaded almost 2,000 containers.

The Development, which has a carrying capacity of more than 13,000 twenty-foot equivalent units (TEUs), came to the terminal after passing through the recently expanded Panama Canal. The ship’s arrival ushered in a new era for the port, Virginia Port Authority (VPA) officials said last month.

“For years, we have been talking about the ‘next generation’ of vessels and the ‘big-ship era.’ This is what we have been preparing for … the big ships are here,” said VPA Chief Executive Officer and Executive Director John Reinhart in a May 9 press release.

Indeed, more than 1,200 “Neopanamax” vessels — ships with a carrying capacity of up to 14,000 TEUs — have passed through the Panama Canal since its $5.25 billion expansion project was completed in June 2016, according to the Panama Canal Authority. The project involved widening the waterway and adding two new sets of locks to allow larger ships to pass through.

In the run-up to the opening of the widened Panama Canal, some observers forecast an uptick in Asian containerized traffic heading to the U.S. East and Gulf coasts due to larger ships arriving. While the overall market share of traffic calling on those ports has been growing compared to West Coast ports, the expanded Panama Canal is just one factor, trade experts and port leaders say.

Going forward, though, the widened canal could spell future volume boosts for eastern ports and railroads. For now, intermodal stakeholders are working to remain nimble regardless of how trade patterns shake out.

“There will be vessels of similar or equal size [as the Development] calling on Virginia with regularity and we are expecting to benefit from increased volumes,” said Port of Virginia spokesman Joe Harris in an email.

From June 2016 through mid-May this year, the port’s overall TEU volumes are up 7 percent compared with volumes during the same period. In addition, the port’s rail volume for the same period grew 13 percent year over year.

“The increase is the result of a number of factors and the Panama Canal is among them,” Harris said.

Other reasons for the Port of Virginia’s rail traffic boost, in particular? The port’s growing double-stack access to key Midwestern markets has played a part. Then there’s the speed at which shippers can reach those markets: Cargo moving via Norfolk Southern Railway’s Heartland Corridor can reach Chicago in 40 hours.

Plus, a growing number of beneficial cargo owners (BCOs) are moving more of their cargo by rail.

In addition to NS, the port is served by CSX, the Commonwealth Railway and the Norfolk & Portsmouth Belt Line Railroad Co.

Traffic boosts in Halifax

The Port of Virginia isn’t alone in container traffic growth. Farther north, the Port of Halifax registered a 14.3 percent jump in container throughput in the first quarter.

That followed a 15 percent year-over-year overall traffic increase in 2016 compared to the previous year’s total.

“We are seeing larger vessels moving through the Panama Canal, and that is having some positive impact on Halifax,” says Lane Farguson, a spokesman for the Halifax Port Authority.

Like other East Coast ports, Halifax soon may begin handling a greater number of big ships after the Port Authority of New York and New Jersey (PANYNJ) raises the Bayonne Bridge between Staten Island and Bayonne, N.J.

Currently, only vessels carrying 9,800 TEUs or less can pass under the bridge, which prevents Neopanamax ships from calling on PANYNJ’s terminals, save the GCT Bayonne. However, the authority is raising the bridge to 251 feet to make way for ships with a carrying capacity of up to 18,000 TEUs.

“That’s going to be the game changer for us and, frankly, for other East Coast ports,” says Sam Ruda, PANYNJ’s deputy director of port business development.

Clearing the Bayonne Bridge

After the Bayonne Bridge project is completed, shipping companies may opt to deploy even larger vessels along North American East Coast trade lanes, says Farguson. That could lead to more traffic for other ports in the region since ships typically call on more than one port during their journey.

The entire $1.3 billion project is expected to wrap up in mid-2019, although the increased navigational clearance will be ready to go by July 1.

“There’s plenty of growth opportunity for additional vessels moving through the Panama Canal, especially once the Bayonne Bridge project in New York is complete,” says Farguson at the Port of Halifax.

For Port Everglades in Florida, traffic originating from the West Coast of South America presents a growth opportunity in the immediate future, says Port Director and Chief Executive Steve Cernak. The port currently handles 15 percent of the United States’ trade with Latin America.

Florida East Coast Railway provides near-dock service at the port’s 43-acre intermodal transfer facility.

It’s also a “reasonable assumption” that the Panama Canal expansion will drive more traffic in general for the port in the coming years, Cernak says.

What’s more, Port Everglades already handles larger ships that have been arriving from the Suez Canal, which was widened in 2015.

Aside from the potential traffic boosts, the Panama Canal expansion also benefited Port Everglades because it created a dialogue about much-needed infrastructure investments, Cernak says.

“It really opened people’s eyes to something that was silent and lacking for years,” he adds.

Infrastructure upgrades

For example, Port Everglades has been working on a plan to deepen and widen its shipping channel since 1996, but it wasn’t until late 2016 that the port received construction authorization to begin the project.

In addition, the port in late May received approval from the Broward County Board of Commissioners to proceed with a $437.5 million project to add new berths for larger cargo ships.

Known as the Southport Turning Notch Extension, the project calls for lengthening the deepwater turn-around area for cargo ships from 900 feet to 2,400 feet. The expansion will allow for up to five new cargo berths.

Another project component involves installing rail infrastructure for newer cranes to handle big vessels.

The South Carolina Ports Authority (SCPA) also is posting progress on its infrastructure improvement plans, which are being made, in part, to capitalize on the Panama Canal expansion. Late last month, the port received $17.5 million from the U.S. Army Corps of Engineers to begin construction on its Charleston Harbor deepening project.

SCPA received another $16.1 million for routine maintenance dredging needed for construction to start. With those funds in hand, the authority is slated to begin the project this fall as scheduled.

Congress authorized the project in late 2016. The work is slated for completion by the end of the decade, SCPA President and CEO Jim Newsome says.

The authority also is building the 280-acre Hugh K. Leatherman Sr. Terminal. The first phase of that project is slated for completion in mid-2020.

The new terminal will boost the Port of Charleston’s capacity by 50 percent. Coupled with the harbor deepening project, the new terminal may position the port to handle any volume increases — whether they stem from the Panama Canal or elsewhere.

In the meantime, SCPA has logged a 10 percent increase in volumes for the first 10 months of its 2017 fiscal year. Newsome hesitates to link that growth with the Panama Canal expansion alone. Instead, he views the increase as part of ongoing growth in East Coast market share.

A continuing trend

In 2007, West Coast ports handled about 60 percent of the TEU market share, while East and Gulf coast ports took on 38 percent. By 2016, the latter figure grew to 44 percent, according to research by professional services firm JLL.

Traffic eventually could be distributed evenly between the two coasts, SCPA’s Newsome believes.

However, the market share shift from the West Coast to the East and Gulf coasts is an existing trend that predates the Panama Canal expansion, says Larry Gross, a partner at FTR Transportation Intelligence, a firm that analyzes freight transportation data.

And even though bigger ships may come through the canal, that won’t necessarily translate to more volume for railroads.

“It could just mean that you’re going to see fewer bigger ships,” Gross says. “When things shift from west to east, generally that is an ‘intermodal unfriendly’ situation for the railroads.”

To make things more complicated, containers entering the United States through the East Coast face a much more congested rail and highway infrastructure, adds Jock O’Connell, international trade adviser at consulting firm Beacon Economics. Plus, the distances from East Coast ports to major inland markets may not be long enough to warrant rail usage.

“You’re probably going to see a greater utilization of trucking” for some short-haul moves, O’Connell says.

Over the next few years, there likely will be a continued gradual decline in the market share of Asian goods coming to U.S. West Coast ports.

“But that doesn’t necessarily mean the West Coast ports will be seeing an absolute decline in cargo,” O’Connell says. “It’s not a total loss situation. It’s just the supply chains are moving toward a more geographically balanced environment.”

Little impact for KCS

For their part, Kansas City Southern Railway leaders have seen “very little direct discernible impact” on traffic since the Panama Canal expansion opened, said spokeswoman Doniele Carlson in an email.

However, changes to some all-water routes pushed freight to U.S. Gulf ports. In the past, KCS had moved some of that traffic from the Port of Lazaro Cardenas in Mexico to Houston.

The Class I’s execs maintain that the rail route through Mexico is a complementary gateway for a number of commodities and products moving between the United States and Asia, as well as the West Coast of Latin America.

“The Panama Canal is just one way to get from the Pacific Ocean to the U.S. Gulf and East Coast regions — Mexico is another, and the U.S. West Coast ports will continue to be an option,” Carlson said. “We believe all these options will be utilized in the future. Diversification is key to most supply chains.”

Additionally, KCS has completed a series of infrastructure investments in Mexico to improve service and consistency for its route from Lazaro Cardenas to the country’s interior.

Ferrocarril Mexicano S.A.de C.V. (Ferromex) execs haven’t observed any major shifts in volume following the Panama Canal expansion, either, says Luis Hernandez, Ferromex’s vice president of intermodal sales.

However, there have been some changes in merchandise traffic moving from the Pacific Ocean to the Gulf of Mexico. For example, Ferromex previously moved wooden flooring and marble products along that route, but now those goods are shifting to the Panama Canal, Hernandez says.

“Otherwise we have been pretty much receiving the same volumes,” Hernandez says. “We have a privileged location with access to the Pacific and the Gulf of Mexico. We don’t expect imports or exports to change because of the expansion of the Panama Canal.”

In the United States, it’s not totally clear to what extent the Panama Canal expansion has affected market share changes on the East and West coasts.

“It had some impact, but I think the greater impact was the labor strike in L.A.-Long Beach,” says Rich Thompson, international director of supply chain and logistics solutions at JLL. “There’s risk involved in all of that for shippers.”

In 2015, disputes with the ports’ labor unions led to brief shutdowns. Those disruptions may still leave some shippers skittish about sending cargo to the West Coast.

Shifting tides

However, leaders at the Port of Long Beach, Calif., are optimistic about a potential contract extension through 2022 with the Pacific Maritime Association and the International Longshore and Warehouse Union. If approved by the unions’ rank-and-file members, the proposal could “bring stability and reassure customers,” says Noel Hacegaba, managing director of commercial operations at the Port of Long Beach.

Although the East Coast’s market share has risen, West Coast ports still are posting traffic increases of their own. The Port of Long Beach, for example, is on track to finish its fiscal year with a 7 percent increase in volumes, Hacegaba says, adding that more than 90 percent of the port’s volume comes from Asia.

“We take a long view when it comes to market share and competitiveness,” he says. “When you look at our actual container counts, it’s actually grown. The pie for the nation has gotten bigger, but our slice hasn’t grown as fast as the broad pie.”

To take advantage of that growth and remain competitive, the port continues to invest heavily in its infrastructure. For example, the port is working on the $1.3 billion Middle Harbor Terminal Redevelopment Project, which calls for combining two aging shipping terminals.

The project also involves increasing the terminal’s size to 345 acres, which could make way for as many as 3.3 million TEU annually, with about half of the containers leaving by rail. The existing terminals handle about 1.3 million TEUs a year

“We view rail as key not just to our competitiveness today, but to our competitiveness in the future,” Hacegaba says.

Ultimately, time will tell whether the Panama Canal expansion will cause any major changes to North American traffic flows. While the widened canal likely will lead to a wider deployment of bigger ships, the effects may be limited, says FTR’s Gross.

“You may see a little bit of an additional effect in terms of West to East shift as a result of that, but I’m not expecting anything dramatic,” he says.

Regardless of how much traffic actually flows through the canal, the project represents a “positive supply chain evolution,” says JLL’s Thompson.

“Any time you have options, it usually creates competition, which creates value for everybody involved,” he says.

For their part, ports and their railroad partners will continue to do what they have been doing: preparing for any shifts and adjusting service plans as needed.

“There are a lot of moving parts here,” says Port of Everglades’ Cernak. “We in the port spaces are just trying to react to demand and handle larger ships.”

Email questions or comments to daniel.niepow@tradepress.com.